posted on April 29, 2005 12:33:04 PM new
http://www.mercurynews.com/mld/mercurynews/business/11520839.htm
Posted on Fri, Apr. 29, 2005
EBay officers agree to pay $3 million
THREE EXECUTIVES SETTLE LAWSUIT OVER IPO `SPINNING'
By Michael Bazeley and Deborah Lohse
Mercury News
Three current and former eBay executives, including Chief Executive Meg Whitman, have agreed to pay $3 million to settle a lawsuit that they inappropriately accepted shares in scores of lucrative IPOs from investment-banking firm Goldman Sachs Group.
Whitman, along with eBay founder and Chairman Pierre Omidyar and former President Jeffrey Skoll, will pay the money into a fund controlled by the company. Goldman Sachs will also make a payment of $395,000, part of the settlement with eBay shareholders.
Investment banks have previously paid millions of dollars in penalties for their handling of initial public offerings of stock. But executives who received hot IPO shares, allegedly in return for their companies' banking business, have largely avoided any legal repercussions.
The payments by the eBay executives -- who are essentially giving their IPO profits to eBay shareholders -- appear to be the first by Silicon Valley executives and among just a handful nationwide.
The allegations in the shareholder suit date back to the peak of the technology boom, when investment banks allegedly tried to curry favor with corporate clients by giving top executives shares in other companies' initial public stock offerings. Dozens of Silicon Valley executives received such shares from various investment banks.
Often, the executives sold the hard-to-get shares on the open market for quick profits.
The practice -- dubbed ``spinning'' -- allowed the banks to show their appreciation for past business and to enhance their chances of getting future business.
Called `gratuities'
State and federal regulators frowned on spinning, which one agency characterized as the payment of improper ``gratuities'' to corporate executives. Regulators sought to end the practice in 2003 when they reached a $1.4 billion settlement with 10 investment banks that were accused of a litany of improper stock-market activities during the tech bubble.
Two of the banks, Citigroup and Credit Suisse First Boston, were explicitly accused of spinning.
EBay made no comment on the settlement beyond a short announcement Thursday.
Goldman Sachs handled the San Jose auction giant's 1998 IPO and a secondary offering the following year. Goldman also advised eBay on its acquisition of PayPal in 2001. Those deals generated more than $8 million in fees for Goldman.
Around the same time, Goldman gave Whitman and the other eBay executives ``thousands of IPO shares managed by Goldman Sachs, at the initial offering price,'' according to court documents.
Goldman Sachs allocated Whitman shares in 100 IPOs at the initial offering price, court records said. Omidyar received shares in at least 40 IPOs, while Skoll got shares in about 75.
Each of the executives sold the shares for large profits, in Whitman's case, $1.78 million.
EBay board member Robert Kagle was named as a defendant in the suit, but he did not make a profit on the shares and will not pay into the fund. Kagle is a general partner at Benchmark Partners, a Menlo Park venture capital firm.
In their suit, eBay shareholders accused the executives of using their corporate stature for personal financial gain. They argued that the lucrative IPO shares should have gone to the company, not individual corporate managers.
EBay rejected that argument, saying the company did not invest in securities.
`Position of conflict'
Delaware Judge William Chandler III refused to dismiss the suit in 2004, saying the acceptance of the shares placed the defendants ``in a position of conflict with their duties to the corporation.''
EBay settled the lawsuit without admitting guilt, the company said. Half the net proceeds will stay with the company, and eBay will give the other half to two charities, Boys & Girls Clubs of Northern California and Appleseed.
EBay shareholders were represented by Pomerantz Haudek Block Grossman & Gross of New York.
Spinning got tremendous attention in Silicon Valley when regulators accused über-banker Frank Quattrone, a former Credit Suisse technology financier, of condoning spinning for about 300 executives and other well-connected people who became known as ``Friends of Frank.''
Quattrone, who was convicted of obstruction of justice last year, is appealing his conviction and denies the charges of spinning.
In 2003, former Qwest Communications International CEO Joseph Nacchio agreed to pay $400,000, and Qwest founder and former Chairman Philip Anschutz paid $4.4 million to settle spinning allegations.
Boris Feldman, a securities-litigation partner at Wilson Sonsini Goodrich & Rosati in Palo Alto, said he's not expecting a tidal wave of leftover spinning lawsuits against Silicon Valley executives.
Suits often tossed
Such lawsuits are often tossed out by judges because they are hard to prove, and few class-action lawyers are drawn to them because the money goes back to the company, not to aggrieved investors.
Payments like those made by the eBay executives are the exception, Feldman said. ``Think of it as the luxury tax on the dot-com boom.''
